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Reclaiming Early Redemption Charges

There has been a lot of action and press coverage about bank charges, and, led by campaigners, customers have disputed such charges and in most cases money has been returned. The banks filibuster and try to hold out for no payment but, with the exception of a few recent cases, they have had to pay up. So the level of many bank charges has been proven to be unlawful.

But what about mortgage early redemption charges? Are these also beyond the law? Can people reclaim these charges? What are the pitfalls?

Early redemption charges are typically paid when a customer switches mortgages whilst still in an introductory or fixed deal, for example beyond the second year of a two-year fixed rate mortgage. Some banks have also introduced an extended early repayment charge, which means that although your deal has run out, you are still liable for a charge for some time afterwards.

Early redemption charges are usually a percentage of the mortgage amount, so it may be 2% of the remaining £200,000 outstanding, which comes to £4,000.

Are the charges lawful?

Any claimants there have been to date have made similar arguments to those against bank charges, saying that redemption charges are for a breach of contract, in that making a switch of mortgage you, the customer, are terminating the contract before the agreed period. The argument continues that any charge, therefore, that is more than the lending company’s administrative costs must be a penalty, and penalty charges are not legal.

There have been up to two dozen cases won so far, all for amounts less than £5,000. All of them have been settled prior to a court hearing. The £5,000 is a key level because for claims under that the costs are only around £150 if you should lose the case. For claims over £5,000 you will almost certainly have to pay the other side’s legal costs if you lose, and mortgage companies’ costs in this situation could well mount up to another £5,000.

And there have been some cases which have been lost. In losses, it would appear that the point about the charges being penalties never even arose, because the claim has been rejected on the grounds that paying off your mortgage early is not a breach of contract, and therefore the charge can’t be a penalty for a breach of contract.

It leaves the ground uncertain. It does seem that claims against early redemption charges are not as simple as claims against bank charges. Most claimants will not find this so easy. Especially when claiming more than £5,000, there appear to be too many risks at the moment.

There are no guidelines yet, but campaigners are looking into this area in more detail, and we can be sure that some guidelines will appear before long. Websites such as The Motley Fool and Money Savings Expert will be on the case and be trying to help as many people as possible reclaim as much of their early redemption charges as they can.

Tom Smith
2nd July 2007

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